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Consumption should be more resilient to high oil prices than in 2008 -Image credit: Getty Images via @daylife

High gasoline prices could have an effect on consumption and thus dampen the coming earnings season. While the 2008 oil price spike that tilted the economy into a deeper recession remains a fresh memory, solid retail sales and a more stable economic environment, along with lower natural gas prices, should help the economy weather the storm.

Fuel prices have been surging as of late, rising more than 20% to an average $3.927 a gallon since December last year, according to AAA’s daily fuel gauge report. Elevated gasoline prices, along with Friday's weaker than expected jobs report, have offered fresh reminders of the weak points in the tepid economic recovery. Investors are now trying to understand how these will trickle down and affect GDP growth and companies’ earnings.

The major threat from high gas prices is the drag on discretionary spending in an environment with lackluster income growth. “The U.S. economy remains consumption-driven” explains Clark Yingst, chief market analyst at Joseph Gunnar. With consumer spending making up about 70% of GDP and 60% of household expenditure dedicated to services, Yingst suggests CPI is effective at capturing inflation in the real economy.

Indeed, Yingst believes higher oil prices could’ve had a deflationary effect in February, forcing consumers to spend more on gasoline and less on other goods and services (February’s core CPI increase was the lowest in five months, according to Barclays, which they consider to be a demonstration that the level of slack in the economy is lower than expected; don’t expect disinflation, they said).

The effect of high oil prices might be less severe than in the past. According to Nomura, while higher gas prices are a concern, a stronger economic environment, milder weather, and very low natural gas prices should ease the strain on households. Last time crude oil went ballistic, in 2007-8, discretionary spending was forcibly cut and the global economy was pushed deeper into recession, the analysts explained.

Decent job growth, despite the most recent non-farm payrolls blunder, “is helping to boost aggregate household income.” The economy added nearly 2 million people to the ranks of the employed over the 12 months to January 2012, compared with about 1.2 million a year ago, according to Nomura. This means that with more people earnings wages, consumers will be able to devote a smaller share of disposable income to gasoline. At the same time, gasoline usage has fallen to its lowest level since 2003, the analysts explained.

Importantly for many Americans, the rise in gasoline prices comes after a mild winter during which the cost of heating their homes was falling. “While gasoline prices are nearly 13% higher than a year ago, natural gas prices are 35% lower. According to the EIA, 50.8% of all occupied households heated with natural gas in 2009 (the latest year of data). Not only has the drop in natural gas prices helped lower home heating costs, demand has also fallen during this unusually mild winter,” they said.

U.S. crude oil prices surged 38% to $109.95 a barrel from late September 2011 to February. International prices, as measured by Brent contracts, went on a similar trajectory, and currently stand above $120. According to Nomura, Brent should average $110 this year, but at $120 U.S. GDP growth should slow by 0.2 percentage points; if Brent remained around $150, that would mean 0.7 percentage points shaved off U.S. GDP growth.

Retailers are among the first to feel the sting of lower personal consumption. Major retailers like Wal-Mart, Target, and Macy’s appear to have overcome the effects of high gasoline prices, at least for the moment. Retail sales rose 1.1% in February, according to the Commerce Department, while Reuters’ same-store sales index rose 4.3% in March, “well above the 1.8% gain of a year earlier.”

A quick look at same store sales and earnings report from 2008 sheds a little light on the aftermath of that year’s oil price boom. Target’s management constantly noted soft sale trends, with comparable sales falling from May to July but overall sales rising. Macy’s saw weak same store sales all through 2008, while Wal-Mart benefitted from the worsening economic environment, seeing sales (excluding energy products) rise through the year.